IFC Risk Management 5

Question 1

The Sharpe ratio measures a fund's risk-adjusted return by comparing excess return to:

Accepted Answer

The fund's standard deviation (total risk)

Answer

The Sharpe ratio divides the fund's excess return (above the risk-free rate) by its standard deviation, providing a measure of return earned per unit of total risk.

Question 2

A fund manager executes a currency hedge to protect a Canadian fund's exposure to euro-denominated assets. The hedge is likely implemented using:

Accepted Answer

Forward currency contracts selling euros for Canadian dollars

Answer

Currency hedging for euro exposure is typically achieved using forward contracts to sell euros (and buy Canadian dollars) at a fixed future rate, locking in the exchange rate.

Question 3

A mutual fund's risk rating of 'High' as required by Canadian securities regulators is based primarily on:

Accepted Answer

The fund's 10-year standard deviation of returns

Answer

Canadian securities regulations require fund risk ratings to be based on the fund's historical 10-year standard deviation of returns, classifying funds from Low to High risk.

Question 4

Which of the following is an example of a 'tail risk' event for a mutual fund?

Accepted Answer

A rare but severe market crash causing losses far exceeding normal VaR estimates

Answer

Tail risk refers to extreme, low-probability events that cause losses far beyond what normal risk models (like VaR) predict, such as a severe financial crisis or market crash.

Question 5

Tracking error in a fund context measures:

Accepted Answer

The variability of a fund's returns relative to its benchmark

Answer

Tracking error is the standard deviation of the difference between a fund's returns and its benchmark's returns, indicating how closely the fund follows the benchmark.

IFC - Investment Funds in Canada Practice Test

IFC - Investment Funds in Canada Practice Test

IFC Risk Management 5